4,000 x 7 = 28,000 of nominal output, and a price level of 1.4
MV = PY says the money supply times its velocity equals the price level times real output. With M at 4,000 and V at 7, nominal output is 28,000; against real output of 20,000 that implies a price level of 1.4, meaning prices 40% above the base year.
As written it is an accounting identity and cannot be false: total spending measured one way must equal total spending measured the other. It becomes a theory only when assumptions are added about which terms are stable and which adjust — and that is where the disagreement lives.
Hold V and Y fixed and money growth becomes inflation, one for one
The classical quantity theory assumes velocity is stable and real output is determined by productive capacity rather than money. Under those conditions the only term free to move when M rises is P, so a 10% increase in the money supply produces 10% inflation. That is the basis of the claim that inflation is always and everywhere a monetary phenomenon.
Both assumptions are contested. Velocity has been demonstrably unstable in recent decades. And output is not fixed in the short run when there is slack — money growth can raise real output rather than prices when workers and capacity are idle, which is the entire Keynesian objection. The identity holds regardless; the prediction depends on conditions that frequently do not.
Reliable for hyperinflation, unreliable for the last two decades
For sustained high inflation, the relationship is robust and well evidenced: every hyperinflation on record has been accompanied by rapid money creation, usually to finance government deficits, and no hyperinflation has occurred without it. At that scale the theory is close to descriptive.
At moderate rates the short-run link is weak. Japan expanded its monetary base enormously for two decades with persistent deflation; US M2 grew sharply after 2008 with inflation below target for years. In both cases velocity fell far enough to offset the money growth, which the identity accommodates and the simple prediction does not.
Consistent units, and a base year for the price level
Money supply and output must cover the same period, and the price level returned is an index relative to whatever base year the real output figure is stated in. A price level of 1.4 is meaningless without knowing that base, and comparing price levels derived from different bases will mislead.
Velocity is normally derived from the other three rather than observed, so entering it as an input inverts the usual direction. That is fine for exploring the identity — which is what this page is for — but it means the result is a scenario rather than a measurement of any actual economy.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.